Statement by Takatoshi Kato, Deputy Managing Director of the International Monetary Fund at High-Level Segment of the Thirteenth Conference of the Parties to the UN Framework Convention on Climate Change

Bali, Indonesia
December 14, 2007

As Prepared for Delivery

Climate change is the largest collective action problem that the world faces. As demonstrated in the latest report by the International Panel on Climate Change, there is now a strong scientific consensus that the earth's climate is changing as a result of man-made emissions of greenhouse gases-and faster than previously thought. The economic impact of climate change is perhaps less fully understood, and there is a need to raise awareness of the economic challenges that lie before us.

The interactions between climate systems and the global economy are highly complex and uncertain, and thus difficult to pin down with precision. But the economic impact is expected to be significant, not only in the coming decades but also more immediately. And there are non-negligible risks of severe disruption in the longer term. Moreover, the economic effects are likely to be felt disproportionately across the world. The countries expected to be most exposed to climate stresses are among those with the lowest economic capacity to adapt to them.

There are likely to be macroeconomic challenges arising from the needs both to adapt to climate change and to mitigate its extent. Indeed they are already starting to be felt. Early and sustained action is needed to avoid future harm, given the latest evidence emerging from the climate science and the rapid growth in global emissions projected for the coming decades without policy intervention. Members of the international community have to cooperate, and support one another, in order to respond to the economic and environmental risks presented by climate change.
The macroeconomic and fiscal effects of long-term climatic degradation and potentially frequent extreme weather events are many and complex. Let me summarize what we at the IMF see as the main economic challenges:
· First, there will be direct negative impacts on output and productivity in many countries.
· Second, the achievement of development goals may be jeopardized by deteriorating fiscal positions-as a result of weakening traditional tax bases and increased expenditure on some aspects of mitigation and adaptation, for example, to counter the effects of rising sea levels and heightened risks of flooding. However, there may also be potential revenue opportunities from efficient carbon-pricing schemes.
· Third, there will be economic costs to households and firms arising from efforts to mitigate carbon emissions, for example as a result of higher energy prices and increased investment requirements (including those designed to reduce exposure to climate risks).
· Fourth, there may be balance of payments problems in some countries owing to reduced exports of goods and services, such as agricultural products, fish, and tourism-and perhaps also from the increased need for food and other essential imports.
· Finally, there exists a range of contingent risks to social and economic stability as a result of climate change, which have potentially important transnational dimensions, including for example massive migration and even conflict.

Climate change is thus likely to have an adverse impact on economic growth over the long run and to set back our efforts to help the poorest countries, unless the international community takes decisive action to cut greenhouse gas emissions and adapt to the impact of their accumulation.

Much of the response to climate change must come from the private sector, including seizing opportunities for technological advances. However, it is essential that these responses are nurtured by a policy framework that ensures proper carbon pricing and adequate provision of national, regional, and global public goods in support of both adaptation and mitigation.

We at the IMF welcome the efforts by the Conference of the Parties to the UN Framework Convention on Climate Change (UNFCCC) and UN agencies to foster international cooperation toward an equitable and economically efficient response to this complex and serious challenge. In particular, we continue to support efforts towards a successor agreement to the Kyoto Protocol by 2009, and designed to: reduce greenhouse gas emissions, promote economic resilience to the impacts of climate change, and accelerate development and diffusion of technological solutions.

Moreover, as a member of the broader UN family, we at the IMF are ready to play our part. The purpose of the Fund, as you know, is to promote macroeconomic stability and high quality sustainable growth. Our very wide membership, together with a great depth of technical knowledge and experience in macroeconomic, fiscal, and financial analyses, the Fund does I believe have a unique contribution to make to the effective formation of policies in this area. So, within the resources available to us, and working in close conjunction with the World Bank and the relevant UN and other agencies, we aim to make a positive contribution to analysis of the macroeconomic implications of climate change, both for individual countries and in terms of the international spillover effects of national policies on greenhouse gas emissions.

More specifically, the IMF can provide advice, through its bilateral and multilateral analysis and monitoring, and through its technical assistance, on appropriate fiscal and other macroeconomic policies to mitigate climate change and adapt to its consequences. For example, we are already active in the design of relevant tax mechanisms and other fiscal measures. In addition, the Fund can provide financial assistance to member countries in response to a range of macroeconomic disturbances, including natural disasters, for example, through the exogenous shock facility for low-income countries. We recognize that the incidence and severity of weather-related macroeconomic shocks is likely to increase as a result of climate change.

Furthermore, the IMF stands ready to collaborate actively with UN agencies, and making appropriate use of its established comparative advantage, to help deepen our collective understanding of the macroeconomic and fiscal implications of climate change, including for example in relation to financial and potential resource transfer issues. This would build on important cooperative foundations laid here at Bali by the dialogue between finance ministers hosted by the Indonesian authorities, and the technical analysis of existing and planned investment and financial mechanisms sponsored and presented by the UNFCCC in response to the request of the Parties at Nairobi last year.

Significant work on the economics of climate change is already under way at the IMF. This comprises, among other things, a study in the Fall 2007 World Economic Outlook, which summarized the state of knowledge and policy debate on the key macroeconomic aspects of climate change. We are now preparing a chapter on the implications of climate change for the global economy for the Spring 2008 issue of the World Economic Outlook, which will analyze in greater depth the macroeconomic implications of climate change and policy responses to it-both in terms of mitigation and adaptation.

In short, the IMF is committed to bringing its particular expertise to bear on the problem, in close cooperation with its members and other international organizations. We recognize the importance of the process, which has been furthered here, and stand ready to support efforts to understand and deal with the complex challenges posed by climate change.